How much money do you need to be financially safe and secure? This is a complicated question for everyone and trying to answer it is particularly stressful for those going through a divorce. After parenting plans are clarified, the most provocative discussion centers around cash flow and how each person will pay bills.
Post-divorce income comes from three potential sources, excluding investment income: income, child support, and alimony or spousal maintenance.
For clarity, the federal government refers to the concept as alimony and our state government uses the term spousal maintenance. Starting Jan. 1, new tax laws regarding alimony go into effect from the Tax Cuts and Jobs Act of 2017. For those already in a contentious situation, these big changes could throw gasoline on the fire.
Many parents accept the notion of child support, because it is intended to help the children live comfortably. Child support payments are separate from alimony and they are not impacted by the new tax laws; however, the notion of alimony often triggers a more tempestuous reaction. The purpose of alimony is to limit any unfair economic effects of a divorce. Part of the justification is to help the lower-income party ramp up economically, and perhaps make up for underemployment or forgoing a career in service of raising children.
For decades, the party who pays alimony (payor) was able to deduct the amount paid from taxable income which resulted in a tax savings. The party who receives alimony would pay taxes, but usually at a lower tax bracket. Starting in 2019, alimony will not be tax deductible to the payor and will be “free money” to the receiver.
Since 2016, New York state has had an alimony calculator. Much like a child support calculator, it factors payments based on income and sets forth a guideline amount to be paid for alimony.
Let’s use the example of Lori and Mark to show how this has worked. The guideline indicates that Lori is eligible for $18,000 of annual alimony. Her spouse, Mark, is in a 30 percent tax bracket. Prior to 2019, Mark would deduct $18,000 from his taxable income and save $5,400 in taxes. So, in effect, the out-of-pocket alimony would be approximately $13,000. If Lori was in a 20 percent tax bracket, she would pay $3,600 in taxes.
Starting in 2019, Mark will have no tax savings and Lori will not pay taxes. This is a very provocative situation and needs to be mediated wisely to avoid escalation of time, emotions and money.
Any couple planning to divorce in 2019 would be wise to seek out a divorce professional as well as an accountant if alimony is part of the conversation. Divorce mediation is an excellent process to negotiate a “fairer” alimony determination, so both sides can avoid expensive litigation. The goal is to mitigate the emotional dynamics that often accompany economic discussions and find a satisfactory resolution for both sides.
Something to keep in mind regarding alimony: Because the receiving spouse can not claim alimony as income, it may affect IRA contributions and health insurance eligibility.
BJ Mann has been a divorce mediator in Rochester for more than 18 years. Her recently published book, “A Better, Not Bitter Divorce: A Fair and Affordable Way to End Your Marriage,” is on Amazon. Visit bjmediationservices.com for information.